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Currencies: Dollar rally sees China’s currency fall through key threshold

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The surge in the U.S. dollar continues to reverberate through global financial markets and moved Thursday through an important threshold versus China’s currency.

That said, analysts and traders said the move that saw the U.S. dollar push above 7 yuan to the dollar for the first time in more than two years remained relatively orderly this time around in a move that’s more about broad-based strength for the U.S. currency.

Indeed, the CFETS RMB index, which measures China’s renminbi against a basket of currencies, “remains steady and well off the highs from earlier in the year pointing to the idea that on a broad basis the RMB (renminbi) is not really weakening that much here with this USD (U.S. dollar) move,” said Brad Bechtel, global head of FX at Jefferies, in a note. The renminbi is the name of China’s currency; the yuan is a unit of the currency.

“Once again, it’s the USD not the RMB at fault,” he wrote.

The U.S. dollar traded at 7.009 Chinese yuan in offshore dealings
USDCNH,
+0.58%

after moving as high as 7.0183 yuan and topping the 7 level since July 2020 as the global economy was initially reeling from the COVID-19 pandemic. In onshore trade, the dollar
USDCNY,
+0.47%

fetched 6.995 yuan.

China’s central bank, the People’s Bank of China, or PBOC, closely manages moves in the yuan in mainland, or onshore, trade. The PBOC sets a daily reference rate, or fixing, in the morning. The onshore yuan can’t move more than 2% above or below that fixing during the day.

To be sure, worries about China’s economy as it continues to pursue widespread lockdowns as part of its zero-COVID policy and deals with the aftermath of a property bubble have certainly been a weight on the yuan. The dollar, however, has been on a tear versus all major rivals with the Federal Reserve seen on track to continue delivering jumbo interest rate hikes next week as policy makers affirm their commitment to wrestling down inflation that continues to run well above target.

See: Why an epic U.S. dollar rally could be a ‘wrecking ball’ for financial markets

The ICE U.S. Dollar Index
DXY,
+0.05%
,
a measure of the currency against a basket of six rivals that doesn’t include the yuan, last week hit a two-year high before pulling back. It pushed back toward those highs this week after a hotter-than-expected August consumer-price index reading reinforced expectations the Fed would deliver a 75 basis point, or 0.75 percentage point, rate increase next week, with some analysts calling for policy makers to lift rates by a full percentage point.

The dollar’s rally has put pressure on oil, gold and other commodities priced in the unit, while being seen as a headwind to U.S. multinationals and a threat to emerging and developing economies with a high proportion of dollar-denominated debt.

Read: A surging U.S. dollar is already sending ‘danger signals,’ economists warn

China’s central bank, meanwhile, has taken steps to brake the yuan’s fall. Last week the People’s Bank of China, or PBOC, cut the amount of foreign exchange holdings banks must hold as reserves in an effort to support the yuan.

Analysts credited the moves with keeping the yuan’s slide from running out of control.

“PBoC’s defensive tactics towards the exchange rate — in an effort to keep the depreciation orderly — have in fact worked. Without those tactics, rate differentials, recent trade-related developments, and the likely net flow of capital would have probably led to a mini-speculative run on the RMB,” said Stephen Gallo and Greg Andreson, FX strategists at BMO Capital Markets, in a note.

Instead, the market saw an “orderly break” of the 7.00 level, they wrote. While the risk of an “ugly” turn in exchange-rate moves isn’t zero, the PBOC is poised to remain on the defensive, the analyst said, noting that the Fed’s aggressive policy stance means that the U.S. dollar “puts the most pressure on currencies where there is no official leanback against USD strength.”

The European Central Bank has shown its “leanback” through monetary policy, lifting rates by 75 basis points last week, the analysts wrote, while Japanese officials “have shown their leanback through verbal intervention.”

The euro
EURUSD,
+0.17%

traded 0.2% higher versus the U.S. dollar at $0.9992, having traded at levels last seen in late 2002 as the prospect of an energy crisis weighs on the outlook for the eurozone economy.

The dollar traded near 145 Japanese yen, its highest since 1998, before setting back Wednesday after news reports said the Bank of Japan was seen checking rates in the FX market, a move that was seen as threatening intervention. The dollar was up 0.3% at 143.54 yen Thursday afternoon.

Hear from Ray Dalio at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. The hedge-fund pioneer has strong views on where the economy is headed.

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